Case Law Update

Like London buses... Another case deciding NEC3 provisions

After waiting a long time for any court decision clarifying the interpretation of NEC contractual provisions, two have come along in quick succession. Following the case of Costain Ltd v Tarmac Holdings Ltd, which was decided at the end of February, we now have the case of Northern Ireland Housing Executive v Healthy Buildings (Ireland) Limited [2017] NIQB 43.

Northern Ireland Housing Executive (the "Employer") engaged Healthy Buildings (the "Consultant") under an NEC3 Professional Services Contract ("PSC"). The Employer failed to notify a compensation event to change the scope of the works as it should have and the Consultant then notified it four months later. It provided quotations a further three and five months later, which were all rejected. All of the communications occurred outside of the prescribed contractual timeframes.

The relevant provision of the PSC was clause 63.1, which stated that "changes to the prices are assessed as the effect of the compensation event upon...the forecast Time Charge for work not yet done". The question in this case was how a compensation event should be assessed after the relevant work was completed? Should the prescribed forecast approach still apply?

The Employer argued that, where the evidence is available, the Consultant's actual time and cost incurred should be taken into account by the court – obviously, it ran this argument, because this approach would reduce the amount of compensation payable by it. In contrast, the Consultant pointed to clause 63.1, arguing that its actual costs incurred were irrelevant. It relied on the fact that this clause goes on to state that the point at which the Employer should have instructed the Consultant to submit a quotation "divides the work already done from the work not yet done".

In reaching its decision, the court recognised that the Consultant's time sheets and associated evidence was the best evidence available to decide the dispute. The question was whether it could be used in light of the PSC's express wording.

The court emphasised that the PSC needs to be read as a whole and, as such, the infamous obligation to act "in a spirit of mutual trust and cooperation" was relevant. It held that it would offend this provision for the Consultant to object to the use of its actual evidence. Further, the court held that business common sense should be applied to the interpretation. As such, and irrespective of the express wording of the PSC, the best information should be used, whether actual or prospective, to assess the compensation event.

It must be remembered that this is a Northern Irish decision. It is not binding on courts in England and Wales but will be persuasive. The court's willingness to rely on the best evidence available when assessing compensation events (rather than following the express words of the contract) is likely to create cost uncertainties for both sides and it is unclear how parties will choose to respond. Depending on the circumstances, the decision may incentivise contractors to get their quotations in as soon as possible on a forecast basis but similarly may encourage employers to not notify or assess compensation events promptly in order to justify the use of an actual costs assessment later on. Of course, neither party will be able to know for certain at the outset which assessment method will favour which party. But parties seeking to 'capitalise' on the decision and potentially exploit the other side should be wary of the impact the mutual trust and co-operation obligation will likely have in curbing such exploitative conduct. As the court held in Costain Ltd v Tarmac Holdings Ltd, this obligation imposes a duty on a party not to improperly exploit the other.

Don't slip up on the 'slip rule'

This case involved an attempt by the defendant to challenge the enforcement of an adjudication decision on alleged breaches of the rules of natural justice. However, the court never really got to that. There was a threshold issue to be decided regarding the 'slip rule' – the outcome being that the defendant had abandoned its right to challenge enforcement.

Before getting into the specifics of the case, it's helpful to briefly revisit the 'slip rule' and how it applies in the adjudication context. Section 108(3A) of the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act") requires construction contracts to contain a provision allowing an adjudicator to correct a 'typographical or clerical error' in his / her decision. The same right is afforded to an adjudicator if the Scheme applies. It seems tame enough. However, parties need to be very careful that they don't inadvertently elect to treat the underlying adjudicator's decision as valid. This is precisely the situation that Marsh Life found itself in in the present case.

By way of background, Dawnus was seeking enforcement of an adjudicator's decision valued at just over £1 million. Marsh Life sought to challenge the enforcement on the basis that the adjudicator had breached the rules of natural justice. However, Marsh Life had previously invited the adjudicator to correct his decision by way of the 'slip rule', on various grounds, including for the alleged breaches of natural justice. Importantly, Marsh Life had not, when doing so, reserved its rights to later challenge enforcement of the decision.

In these circumstances, the Court held that Marsh Life had waived or elected to abandon its right to challenge enforcement of the decision. By invoking the slip rule, Marsh Life had to be accepting the underlying validity of the adjudicator's decision (otherwise there would be no valid decision to 'correct'). Citing a number of authorities, McKenna J relied on the doctrine of election which prevents a party from 'blowing hot and cold' in relation to an adjudicator's award. He stated that "It cannot be right is open to a party to an adjudication simultaneously to approbate and reprobate a decision of the the absence of an express reservation of rights, either the whole of the relevant decision must be accepted or the whole of it must be contested." Consequently, Marsh Life was precluded from challenging the decision and Dawnus was successful in its summary judgment application.

This case is a helpful reminder of the dangers of the seemingly simple slip rule and the importance of ensuring that a party reserves its rights if it intends to subsequently challenge the decision.

"All for one and one for all" – Claims against co-insured parties

In this case, an insurer ("Gard Marine") attempted to bring a subrogated claim against a negligent sub-charterer for money it had paid out to the owner of a vessel that had run aground. The charter agreement contained a co-insurance clause requiring the charterer to take out property damage insurance in joint names with the owner against specified risks. It should be noted that Gard Marine made its claim against the sub-charterer as assignee of the rights of both the owner and the charterer. The sub-charterer was not a co-insured itself.

The charter agreement and sub-charter agreement contained a safe port warranty, breach of which was alleged to have caused the total loss of the vessel. Gard Marine argued that the charterer's / sub-charterer's liability for breach of this warranty should not be excluded by the insuring clauses. The agreement contained two alternative insuring clauses. The one the parties chose did not expressly waive the rights to a subrogated claim, whilst the deleted clause did.

The case was complex, but for our purposes, the key issue was whether the co-insurance provisions prevented the insurer from making a subrogated claim and, practically, what happens in a situation where the wrongdoer is a sub-contractor that is not co-insured itself?

The problem was that there were no clear words excluding a subrogated claim. A previous authority (from a construction context) had put emphasis on the need for clear words to prevent this. However, the majority of both the Court of Appeal and Supreme Court spoke unfavourably of this authority, stating that the need for clear words should not carry as much importance. As per the Court of Appeal: "the prima face position where a contract requires a party to that contract to insure should be that the parties have agreed to look to the insurers for indemnification rather than to each other. That will be the more so if it is agreed that the insurance is to be in joint names for the parties' joint interest...".

The Supreme Court agreed. However, it was divided on what this meant in practical terms where a third party had contracted with the co-insured but wasn't a co-insured itself. The majority took the view that the insuring provisions excluded any liability to pay damages by a co-insured (and so a co-insured has no liability that it needs to recover from its third party agent that caused the damage). Lord Mance stated that "under a co-insurance scheme like the present, it is understood implicitly that there will be no such claim [between owners and charters]... and this applies in my view, whether insurance monies have or have not been paid". This was held to be the case irrespective of the express safe port warranty. The minority disagreed, taking the position that the insurer's payment merely satisfied any liability to pay damages as between only the co-insureds themselves, leaving open the possibility of a subrogation claim against the third party.

This case has important implications for the construction industry. Parties should consider very carefully the impact of the insuring clauses agreed in their contracts. This broader approach to the rule that co-insureds cannot claim against each other is likely to apply where it is agreed the insurance will be for the joint benefit of the parties (it does not have to be in joint names). Also, without clear words stating otherwise, parties may arguably be limited to recovering only those losses allowed under the relevant insurance policy, even if there could be a separate claim for a different value, e.g. for breach of contract. The question then is what wording will be sufficient to supplant this implication? Parties should take a cautious approach and ensure that they spell out very clearly if a warranty or indemnity is intended to override / be unaffected by the insurance arrangements.

Regulatory News

Shortly before the dissolution of Parliament at the beginning of May, Mr Alan Brown, MP for Kilmarnock and Loudoun, introduced a Private Members' Bill to reform the treatment of cash retentions in the construction industry. Mr Brown noted that retentions are often not released in a timely manner, requiring small to medium enterprises to spend time chasing for their release. He also said that retentions may be lost altogether due to the insolvency of a firm's upstream contractor or employer.

The Bill provides possible alternative routes for the construction industry to follow, which include Project Bank Accounts (which are operated on all Scottish Government projects where the Government is the employer) and retention monies being ring-fenced in separate bank accounts (an approach adopted in the US, Australia and New Zealand). Following the dissolution of parliament and the recent General Election, the bill will now need to be re-introduced and it will be interesting to see whether the proposals survive this interruption.

Clyde & Co 'In the News'

Robert Meakin, partner at Clyde & Co, featured in Construction News this past month commenting on the PF2 pipeline delay. He stated that: "While it was inevitable that the election would put another obstacle on the path to a new private finance pipeline (as if Brexit itself wasn't enough), the underlying rationale for an effective iteration of the model remains, and can only grow stronger as investment in public infrastructure continues to lag behind essential needs.

Whoever picks up this brief after the election, the likelihood remains that there will be a positive announcement – albeit later rather sooner. By then, however, the risk is that the government may have spent so long reinventing the wheel on the PFI bus that many in the industry will have got tired of waiting, and booked an Uber to other opportunities."

Readers with a subscription can view the full article here.

Liz Jenkins, partner at Clyde & Co, also featured in Construction News, writing about procurement post-Brexit, questioning whether or not the current procurement regime will continue once the country has left the EU.

Readers with a subscription can view the full article here

Robert Meakin, partner at Clyde & Co, was quoted in The Telegraph following the election last week, commenting that a hung parliament may mean for businesses. He stated that "A hung parliament could be the worst possible result for business...with the economy already struggling with the uncertainty of Brexit, the last think we need is further confusion and delay in the government's investment strategy. The Article 50 clock is also ticking and business will be eager to ensure that there is a clear and consistent voice at the negotiating table, so as to minimise further damage to the economy. The sooner a viable government is in place, however it's composed, the better."

Readers can view the full article here.

Projects & Construction Law Update

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